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Read Full Bio >If you are planning to move out of your current property, you might wonder whether you could sell that house to a family member. But does UK legislation allow you to part with property for below fair market value in order to help out a child, grandchild, parent or sibling?
Below, we’ll discuss selling property below market value to a friend, family member or loved one.
We’ll answer a range of questions, including “can I sell my house below market value to my son?”, “what are the tax implications if I sell my house to a family member for £1?” and even “can an executor sell property below market value?”.
Can I Sell My House Below Market Value to My Son?
Absolutely. As your home is your property in every sense of the word, you can sell it to whomever you choose, for any chosen amount.
You can sell it for just £1 – or even less – as is outlined in this helpful guide.
However, it is important to ensure that money changes hands. This is the only way in which a contract of sale may be created. If there is no contract, the sale is not legally binding.
If you do decide to sell property below market value, the “discount” you offer will almost certainly be subject to taxation. This is because, in the eyes of the law and of HMRC, the difference between the house’s fair market value and the amount for which you sell it is considered a “gift”.
What are the Tax Implications if I Sell My House to a Family Member for £1?
When you hand over an asset of value to another individual without any request for remuneration (i.e., if the value of the asset is not to be considered a loan), it constitutes a “gift” and is therefore taxable.
Specifically, HMRC requires that Inheritance Tax is paid on gifts worth over £3000. This amount “resets” annually, which means that you can give gifts valued up to £3000 every tax year.
If you do not use the entire allowance, you may carry the remainder over into the next tax year. However, this can only be done once!
There is no Inheritance Tax payable on gifts of any size between legally married couples or civil partners, as long as both parties live in the UK.
How Does Inheritance Tax Work?
Inheritance Tax is a levy on the estates of deceased individuals.
Along with the aforementioned £3000 annual threshold (or “allowance”), Inheritance Tax – or IHT – works according to very specific conditions. These are as follows:
- IHT is only payable on a gift if the giver’s estate is valued above £325,000. This is known as the nil-rate band (or NRB)
- If you give away gifts with a combined value that surpasses the NRB within the seven years prior to your death, IHT will be payable by the recipients when you pass away. However, if the total value is less than the NRB within those seven years, IHT will be payable by your estate
- If the estate is worth over £325,000, IHT will not apply if any amount beyond the NRB is given to the deceased’s spouse or civil partner – or, failing that, to a charity or amateur community sports club
- It is possible for legally married couples or civil partners to “combine” their NRB amounts, which means that IHT will only be payable on a joint estate worth over £650,000
- There is a “seven year rule” applicable to Inheritance Tax, whereby tax is not charged on any gift that is given if you live for seven years beyond the date on which you gave it. The only exceptions are gifts that constitute part of a trust
- Should you live for three years after giving the gift, tax will be levied at 40% of its value
- If you live for between three and seven years following the giving of the gift, the percentage charged will reduce on a sliding scale
Selling Mortgaged Property Below Market Value
Can you sell a property with a mortgage below market value? The answer is yes, you can, but the property must sell for at least the amount that is still outstanding on that mortgage in order to see the loan “paid off”.
If you do not wish to do this, you may take out a loan to cover the amount owed before selling. Of course, it is vital that you have the capacity to repay the full amount with interest within the time stipulated in its terms.
Alternatively, you may transfer the mortgage to the property’s new owners as part of the sale. However, they will need to pass all of the checks required by the provider, so the process can become fairly complex.
Another approach is to arrange a lease option, which we will discuss below.
What is a Lease Option?
If you wish to avoid the pitfalls of directly selling a house to a family member for below market value, a lease option will allow them to rent that property from you for a set period of time.
Along with the rent that they pay during that time, an additional fee will be charged that counts as a downpayment on the property. At the end of the stipulated period, the family member will have the option to purchase the home for themselves.
This approach can make it easier for a loved one to buy property without IHT or complex legal procedures. You can even fix the agreed eventual sale price so that it is not affected by inflation.
Can an Executor Sell Property Below Market Value?
If you are acting as an executor for a family member, spouse or civil partner, you and the other beneficiaries may wish to keep any property owned by the deceased “in the family” – even if it has not been left to a named individual.
As executor, you are permitted to sell the property in question to anyone you choose unless there are any clauses in the will that prevent this, or unless the property has any surviving joint owners. But can you sell the property to a family member for below market value?
This is a difficult question. While you are usually permitted to sell the house even without the permission of the will’s beneficiaries, you are legally obliged to seek its fair market value when doing so.
This is because, as a beneficiary, you are required to act in the best interests of the estate.
For this reason, you certainly cannot sell the property below market value to one of your own family members – particularly if they are not a beneficiary of the deceased’s estate.
This rule can even extend to a situation in which you plan to sell the home for a discounted price to another beneficiary of the deceased’s will – in order to provide them with financial aid or to keep the property “in the family”.
In a case of this kind, other beneficiaries have the right to take action against you and demand that you pay them the difference between the house’s value and the amount for which it was sold.
For this reason, you must tread carefully when selling property associated with an estate for which you are the executor. Always seek legal advice if you are unsure of what to do.
Any Questions?
The above guide should provide you with all of the information you need to know about selling property for below market value to a family member. For further details about selling property fast, simply get in touch with our team today.
We’ll be happy to assist you with a free valuation and a cash offer up front.
